Vol. 16 No. 1 Summer 2007
Why Forest Product Companies Are Selling Their Land
We’ve seen a lot of changes in the forest industry in Louisiana in the last ten years. Companies have been buying other companies, and most of the industrial land base has either been sold or reorganized into real estate investment trusts (REITs). This trend is continuing. I will try to summarize the major reasons why vertically integrated forest products companies (VIFPCs) are selling their land or reorganizing ownership of the land using information from a report entitled “TIMOs and REITs” prepared by Cliff Hickman, forest management staff forester with USDA Forest Service, Washington Office.
There are a number of inter-related reasons VIFPCs are either selling their land or reorganizing the ownership and control of it:
1. Most VIFPCs are Sub-Chapter C corporations and are double taxed. This means that they are taxed 35% at the corporate level and shareholders are taxed 15% for dividends, resulting in the owners receiving only 50 cents of every dollar. Individuals, Sub-Chapter S, and Limited Liability Corporations (LLCs), including timber investment management organizations (TIMOs) and real estate investment trusts (REITs) are only taxed once at 15% on either long term capital gains or dividends.
2. Accounting principals prevent Sub-Chapter C corporations from realizing any gain in appreciation on their timberland assets unless a sale occurs. Sub-Chapter S, LLCs, TIMOs, and REITs can all show increases in value on their books due to growth and price appreciation of their inventory.
3. VIFPCs have undergone a consolidation process during the last 15 years so that they can better compete in global markets. Much of this consolidation resulted in large debt. The land acquired in these consolidations was often the major hard asset.
4. The “Forestry and Paper Group” showed average ten year returns from 1995-2005 of 6.2%, as compared to the S&P 500 and Dow Jones Industrial Group that showed 12.1% and 13.1% respectively. This poor financial showing was in part due to the three preceding factors.
5. Timber supplies are plentiful. The reason VIFPCs bought land originally was to ensure the supply of timber to their manufacturing plants. They have confidence that adequate supplies and sources of timber are available on the open market to supply their mills. VIFPCs also make long term supply agreements with the purchasers of their land.
6. Timberland values have been rising. Many investors in timberland realized annual returns of over 20% from 1987-1999. Institutional investors took note of both the annual income that can be generated as well as the price appreciation of the assets.
From the factors mentioned above, it becomes obvious that the present tax laws make corporate ownership of timberland inefficient and less profitable than other forms of ownership. VIFPCs have to either sell their lands or reorganize themselves into more profitable ownership in order to be competitive. One way they can reorganize is through a REIT. This is a separate legal entity that owns and controls the land. There are presently four publicly traded timber REITs: Plum Creek Timber Company, Inc., Rayonier Inc., Longview Fibre Company, and Potlatch Corporation. Weyerhaeuser now has a REIT specialist on their board.
Thus far in Louisiana, VIFPCs such as Louisiana-Pacific, Boise Corporation, and International Paper Company have chosen to sell their land. Much of the land was bought by closely held family forest products firms such as Martco and Hunt Forest Products. Other private investors were able to purchase portions of the properties for sale. The Nature Conservancy has increased their holdings through these sales. However, the largest purchasers of the lands have been institutional ones such as pension funds, insurance companies, and foundations. TIMOs represent these various owners in their timberland investments.
TIMOs have access to huge amounts of cash. They are responsible for managing the investments to yield the best possible returns. The investments usually have a limited term of ten to 15 years, with an option for renewing. Often the land is sold at the end of the term if not renewed.
So, what do these things mean to the forest landowners in Louisiana? I believe it means that we will continue to see strong interest in owning forestland by both institutional and private investors. Forestland values have been increasing and I believe they will continue to rise. I believe we will continue to see some TIMOs sell small parcels at retail prices that have higher and better uses than timber production. TIMOs and REITs have shown they make little changes in timberland management from VIFPCs. I expect we will continue to see responsible forest management from them.
As a private forest landowner you can benefit from professional forest management from Templin Forestry, Inc. to assist you in making informed decisions regarding your property. We pledge to represent your interests to the best of our abilities. We’d be glad to discuss your property objectives and want to help you achieve them.
The Stumpage Report
The spring of 2006 was fairly good for selling timber. However, it was a rough summer and fall for pine sawtimber prices. Housing starts in 2006 were off 14.8% from 2005. The mills didn’t begin to cut back production until late 4th quarter 2006. Wholesale prices for lumber and panels fell every month in 2006 and are stabilizing at nearly 30% below their 2005 levels. Prices for pine sawtimber declined so drastically during the late summer we stopped selling timber except for distressed sales. We’ve seen a wide spread in the pine sawtimber stumpage prices so far in 2007. Sales of timber with good characteristics have brought pretty good prices. Sales of timber with poor characteristics have brought poorer results. With that in mind, I want to share a simplified version of the factors we consider when evaluating the value of a stand of timber.
The Factors Affecting the Value of Timber:
- Desirability of the Timber.
1. Total Timber Volume. Timber buyers want a large volume of timber. It costs money and time to move loggers. They can pay more per ton for timber on a tract that they can work for several weeks than they can for one they can work on for a few days.
2. Timber Volume Per Acre. Logging contractors need to be efficient. The more volume per acre, the faster they can cut it and the more loads they can make in a day. Clearcuts normally bring a higher price per ton than thinnings.
3. Size of the Trees. Normally, larger trees bring better prices per ton. More valuable products can be made from larger trees than from smaller ones. The mills do have size limitations, and oversized trees do not bring the high price they once commanded.
4. Grade of the Trees. Trees with many limbs and knots lower the value of the products made from them. Straight trees with little defects bring higher prices.
- Desirability of the Tract.
1. Exterior Access. Land that has public road and all-weather access results in more efficient logging and higher prices than land that has woods road access that may have restrictions and crosses other landowners.
2. Interior Access. A maintained road system on the property provides access to the timber and can lower logging costs. This results in more value to the landowner.
3. Distance to the Mill. Tracts of timber located near competitive mills will bring much higher prices than timber located far from mills. Fuel is often the highest logging cost.
4. Soils and Topography. Well drained soils on hills that can withstand timber harvesting during many months will result in higher timber prices than tracts having soils that are poorly drained and restrict logging to a few months a year.
C. Quality of the transaction.
1. Number of Bids. Stumpage prices are normally strengthened with the higher number of bids.
2. Buyer. Timber buyers are consistently knowledgeable. However, they can have supply problems or other stresses that could result in higher prices than they would pay if they had large supplies and no stress.
3. Seller. A poorly informed seller under duress will result in obtaining a lower price than one that is knowledgeable and under no duress.
Landowners can control some of the above factors. Some factors we have little or no control. You can increase the value of your timber and net income to you by addressing as many of the above factors as possible.
Pulpwood markets have been fairly good and are expected to remain fairly strong throughout this year. Also, the hardwood tie markets are excellent. Most hardwood tie mills currently have low supplies, and there is high demand by railroads. The quality hardwood markets are mixed. Red oak probably will not bring +$600/MBF again anytime soon, but it is still relatively strong.
One of the problems I see in the timber markets is logging capacity. The logging force has been slowly dwindling. The loggers that are making it are the larger, more efficient ones. As many loggers shift towards the pulpwood and OSB markets and others work to harvest timber for the hardwood tie markets, there will be fewer loggers supplying the plywood and saw mills. Prices for delivered logs are expected to drop some as housing starts will be lower this year. In summary, I assess the stumpage markets as being functional. I do expect to continue to see fluctuations in the markets this year. We strive to sell timber for our clients at or near the peaks of the markets for whatever products we are selling.
We have decided to discontinue our graph comparing the average stumpage prices our clients receive for pine sawtimber with those reported by the state. The state averages didn’t reflect the reality of the markets post Katrina. We are, however, continuing to show the average quarterly prices Templin Forestry clients received in a graph along with the average lumber and panel prices from data compiled from Random Lengths.
* compiled from Random Lengths
** average of Templin Forestry, Inc. clients
The Real Estate Page
Potential Development Properties
Waterfront on Toledo Bend - 45 acres along Turtle Beach Road. This tract also has ¼ mile frontage along Loggerhead Road. The tract will need to be surveyed and the total price calculated from the total acreage. $8,000/acre. The entire tract is to be sold, no smaller units available.
Approximately 120 acres with frontage along Turtle Beach Road. $2,200/acre. The tract will need to be surveyed and the total price calculated from the total acreage. The entire tract is to be sold, no smaller units available.
Approximately 162 acres along Cypress Bend Road adjacent to Cypress Bend Golf Course. $3,000/acre. The tract will need to be surveyed and the total price calculated from the total acreage. The entire tract is to be sold, no smaller units available.
Timberland
25.6 acres in eastern Rapides Parish. This tract has a natural pine stand that is ready for thinning. Access is poor. $1,500/acre.
35 acres south of Oakdale. This tract was planted with loblolly pines in 2007. This tract has woods road access and a nice streamside management zone. $1,350 /acre.